MUMBAI (MarketWatch) -- Moody's Investors Service Tuesday cut the standalone rating of State Bank of India (500112.BY), flagging concerns over capital and weakening loan quality at the country's largest lender by assets.

The downgrade upset investors, who sent the bank's shares down to a 52-week low of INR1,751.35. They regained some of the losses, but were still trading 4.6% down at INR1,776.90 on the Bombay Stock Exchange at 0835 GMT, compared with a 3.6% fall in the banking index and a 2% drop in the benchmark Sensex.

"Our expectations that non-performing assets are likely to continue rising in the near term--due to higher interest rates and a slower economy--have caused us to adopt a negative view of SBI's creditworthiness," Beatrice Woo, vice president and senior credit officer said, in a statement.

Moody's cut its rating on state-run SBI's bank financial strength to D+ from C- earlier. It also lowered its hybrid debt rating on the bank to Ba3 (hyb) from Ba2 (hyb), following the reduction in financial strength rating.

In the April-June quarter, the bank had a Tier-I capital adequacy ratio of 7.60%, which was lower than other top local lenders like ICICI Bank Ltd. (532174.BY), HDFC Bank Ltd. (500180.BY) and Axis Bank Ltd. (532215.BY).

The level of SBI's capital ratio provides "an insufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality," the ratings firm said.

Higher provisioning against bad loans has been weighing on SBI's earnings. In the April-June quarter, the bank's bad loans, as a percentage of total advances, reached a three-year high of 3.52%.

"Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital," Moody's executive Woo said.

SBI plans to raise INR50 billion-INR90 billion through the rights issue. It had earlier planned to raise INR200 billion-INR230 billion, but the proposal didn't get the approved of the government, its largest shareholder with a 59.4% stake.

"And given that a bank's ability to freely access the capital markets is an important rating criterion globally, we therefore believe a lower bank financial strength rating for SBI is warranted, especially as these circumstances are likely to recur," Moody's said.

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